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Farmer Fertilizer Focus - UAN

By: Josh Linville, Vice President- Fertilizer

UAN (28% / 32%)
 
Josh Linville
Director - Fertilizer
What everyone wants to know first, what do we think will happen going forward
It's bullish looking forward because supplies are well under expected demand today.  Why/how did we get here:
  • Spring season ended with extremely low inventory levels (you guys ran them out!!!)
  • CF filed the anti-dumping/counter vailing duty case against Trinidad/Russian produced UAN (approximately 80% of U.S. imports)
  • Hurricane Ida stopped production in the Delta region for at least 2 - 3 weeks
  • Inland production issues have continued to be a problem (hopefully working themselves out now)
  • European natural gas prices skyrocketed which greatly reduced production in that area
  • Fear is gripping the market that supplies will not be adequate enough to have everyone filled before next spring season

I have no doubt I am missing other points but they all combine to one nice and neat little statement: it is very likely that high UAN prices are here to stay.

Don't get me wrong, anything can happen.  If this year has taught us anything, it has been that.  However, when I look at the market right now, I really struggle to see prices falling anytime soon.  The producers are too in control of the market.

We are already at/slightly above the high's set in 2008 but it seems like more pain is in the pipe.

What has happened in the last 30 days?
European natural gas prices skyrocketed and stayed there
A big headline in the past several weeks has been European natural gas values going from single digits to around $40 MMBTU before settling back into the $20's.  The net result is the loss of A LOT of nitrogen production in the region. 
There is of course a lot of speculation as to the "why" of it happening.  Is it their dependence on green energy which reportedly failed to meet expectations this year?  Is it Russia limiting supplies in order to get their new pipeline built?  Is it market traders taking advantage of the marketplace?
I'm no natural gas expert and I will not pretend to be.  All I can tell you is that current prices are really high and they show little to no indication that they will drop before next April based on the futures market.  The net effect is the loss of a large percentage of an entire production REGION.
We will be crossing our fingers that nat gas prices correct.  Not only for our fertilizer markets but also for the people of Europe who will be shocked at their home heating bills this winter.  However, until that happens, we have to assume that production there will remain down for the foreseeable future and they will become a much bigger buyer of UAN (i.e. less supply for everyone else).
North American production issues persisted
It has been hit after hit after hit for UAN production.
It all started with Hurricane Ida.  Luckily, after the storm passed, we learned that the production facilities emerged relatively unscathed.  Unfortunately, we learned that without electricity, the unscathed part doesn't matter as much...
After that was rectified, we started having multiple inland production issues.  Now, none of these facilities are going to come right out and say "this was the problem" and "we lost this much production".  That isn't how it works.  We are forced to make assumptions based on the information we put together.  Unfortunately, that information pointed to a lot of lost production time in a period where we needed everything to run seamless.
We matched/broke 2008 price records
I'm not sure if I should laugh or cry at this point.
CF rolled out a fill program a couple weeks ago that largely matched the high price that was seen in 2008 based on netbacks to the gulf.  However, as has been the case all summer, the number of tons offered to the retail market was extremely limited.  Worse still, it was heard that CF was sold extremely well into the January timeframe.  That means that they are comfortably sold and can resist a good amount of bearishness if it presents itself.
If your retailer/supplier tells you they do not have a price yet, it is because the production side is not giving them enough product to roll out a program.  
Where are current values in relation to the past
For UAN, we use NOLA/New Orleans Louisiana as our base point as it is the easiest spot to track.
  • Vs 30 days ago - +25% or approximately $110 higher
  • Vs 90 days ago - +79% or approximately $240 higher
  • Vs 6 months ago - +87% or approximately $254 higher
  • Vs 1 year ago - +354% or approximately $425 higher
Bull/Bear Factors
Because no market is ever guaranteed to go higher/lower, we try to consider the factors that can sway values so that we are able to act when they occur rather than react.
Bullish Factors
  • European production remains down – high natural gas input values are leading to the loss of a lot of UAN production in Europe.  The demand is still there that is reliant on that production.  That makes them a much bigger importer than normal.  There is more competition for tonnage in the world.
  • North America has lost a lot of its own production and is much lower on inventories than normal – go back to the top and reread all the factors that are lending themselves to a bullish market.  The balance of negotiation power is tipped squarely toward the producers today and they REALLY like higher prices.
  • Demand still looks solid for spring '22 – I was starting to have my doubts when corn values were not moving for Dec '22.  However, that has started to change recently with prices rallying.  It seems that the corn market is intent on getting its 92M acres next year.  That means UAN demand should remain solid.
Bearish Factors
  • Corn acres can be lost quickly – higher than expected yields this fall.  A move by D.C. to do away with ethanol mandates.  Chinese demand disappearing.  All of these seem like low likelihood events but each one could cause demand of UAN to dry up very quickly.
  • European natural gas prices could plummet – if we saw values drop back to the single digits (even lower teen's would help), while we would still be fundamentally firm, the market would be emotionally soft.  The top end of the market would be taken out and participants would be looking to protect downside price risk (roughly means more sellers than buyers).  As a result, UAN prices would feel the heat.
  • UAN continues to be the premium price N product – for the last few years, UAN has enjoyed being a discount to urea which meant more demand than normal.  However, it is once again the premium product and farmers are always looking for the cheapest route forward.  If enough demand shifts to urea or NH3, it could outweigh what has been lost for supply and see prices under pressure.
Where are the current uan/grain ratio values today?
We believe that only looking at the flat price of either grains or fertilizer can be misleading:
  • Only selling grain can hurt you if fertilizer prices rise substantially
  • Only buying fertilizer can hurt you if grain prices fall
We look at the ratio "value" to get a better indication of where we are or how many bushels of X does it take to pay for 1 ton of fertilizer.
Would you rather:
  • Spend 100 bushels to pay for 1 ton of UAN
  • Spend 60 bushels to pay for 1 ton of UAN
When we compare the current ratio value against recent years, we start to see if we are high or low.
YOUR VALUES WILL LOOK DIFFERENT
This graph looks at the NOLA UAN price vs the flat grain price. There are no logistics on either product. Your location will look different due to fertilizer logistical costs, grain basis, etc.
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Josh Linville’s Thoughts
  • DO NOT BE MAD AT YOUR SUPPLIER IF THEY DO NOT HAVE A PRICE YET.
  • Read the above 3 more times.
  • UAN producers are being very conservative in selling UAN inventories because they believe prices will be higher on the next round.  This market has NEVER seen a situation like this (not able to buy the product).  It has always been a situation where you might spend more for it but you could find it any given day.  These are unprecedented times.
  • Make the best decision for your operation.  What works best for you may not be the best for your neighbor, the next state over, another country, etc.  The biggest risk to most farmers is letting emotion cloud sound judgement.  I know it is really easy to sit in my chair here and say this.  Much more difficult to put into practice.  No one is perfect but the more you can keep that in your head, you will be further along than most.
 
 
 
  • Fertilizers

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